Eric Yuan, founder and chief executive officer of Zoom Video Communications Inc., center, reacts … [+]
© 2019 Bloomberg Finance LP
This year, the IPO market got off to an inauspicious start. Because of the US government shutdown, the Securities and Exchange commission lacked adequate staffing to review S-1 filings. The result was that most IPOs had to be delayed. It also did not help that December saw a sharp downturn in equities.
But of course, the shutdown ended. There was also a strong comeback in the markets.
Thus, as we approach the end of the year, the IPO market has done fairly well. There were 159 offerings that raised a total of $46 billion, with the average return of 20%.
Great, right? Well…perhaps not so much. Keep in mind that you would have done much better if you invested in the QQQ Trust ETF (QQQ), which tracks the Nasdaq 100. It’s up nearly 40% for the year, driven by the strong performance of megacaps like Apple, Microsoft and Facebook.
So what about tech IPOs then? How did they perform? Note that there were 41 deals and the average return was an awful -4.6%, according to Renaissance Capital (this is based on the returns after the first day).
Interesting enough, the top sector was consumer staples, up 103% (yet there were only three deals). Financials and materials IPOs also posted strong gains.
Now the underperformance of tech IPOs should not be surprising. After all, companies have been waiting much longer to come public–which means that by the time they hit the markets, the growth has begun to decelerate. For the most part, the benefits will have mostly gone to venture capitalists, founders and employees.
But these companies also act as if they are still in the startup phase!
“The tech IPOs of 2019 signaled that public market investors have limited appetite for high cash burn businesses even with strong growth,” said Kyle Lui, who is a partner at DCM. “On the other hand, Bill.com, one of the last IPOs of 2019, jumped over 60% on its opening day, signaling that the window is still very much open for high growth businesses with modest cash burn.”
Consider this: DoorDash, Uber, Lyft, and WeWork will lose a staggering $13 billion this year.
“Another lesson is that the private markets have been way too overvalued,” said George Arison, who is the co-CEO and founder of Shift. “The Valley had too much irrational exuberance that both investors and employees fell prey to. It’s unfortunate, and the correction that’s come as a result of that isn’t pretty.”
Zoom, Zoom, Zoom
This year’s highest performing tech IPO was Zoom. The company, which operates a video conferencing platform, came public in April and on its first day of trading, the shares soared by 72% to $66.64. And as of now, the return is about 85%.
I’ve written about Zoom in Forbes.com before and have met with the company’s CEO and founder, Eric Yuan. An immigrant from China, he set forth a clear vision for creating a standout product. He also raised a modest amount of capital–at least by Silicon Valley standards–and was mindful of the bottom line.
Just look at the most recent quarter: revenues jumped by 85% to $166.6 million and GAAP net income came to $2.2 million. Cash flows were also strong, hitting $61.9 million, up from $18.2 million in the same period a year ago.
So yes, it’s likely we’ll see many tech CEOs look at the Zoom model as a guide. But then again, it will not be easy.
“Truth be told, very few of the recent consumer or enterprise IPOs are profitable today–so in 2020, there will be a narrowing of the timing expectations to profitability rather than an insistence on profitability today,” said Sean Cantwell, who is a Managing Partner of Volition Capital. “Investors will still be willing to stay with a company post IPO if they believe in the sturdiness of the business.”
Tom (@ttaulli) is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction.